Analyzing Market Demand and Building for Success

As an experienced self-storage investor, I know that it's not always easy to identify a market that is doing well, especially since markets can change so quickly. It's important to be able to differentiate between a good market and a bad one, even if the good market appears to be thriving. Today, I want to talk about the three ways to analyze market demand to build success. I'll also share some insights on how to evaluate the risk in a seemingly good market and how to identify potential pitfalls. 

• Transitory vs. Core Occupancy

In the self-storage industry, one way to evaluate the risk in a market is to look at the types of occupancy as it is an important metric that measures the utilization of storage units. There are two types of occupancies: Transitory and Core. 

• Transitory occupancy refers to people who are temporarily staying in the area, such as students, military personnel, or short-term renters. It also refers to the percentage of units that are occupied for a short period of time, such as a few weeks or months. This type of occupancy is often seen during peak moving seasons or during temporary storage needs. 
• Core occupancy, on the other hand, refers to the percentage of units that are occupied by long-term renters, usually for several months or even years. These renters tend to be more stable and reliable sources of income for self-storage businesses.

It's important to understand the balance between transitory and core occupancy in a market, as an over-reliance on transitory occupancy can be risky. In some markets, a large portion of the occupancy may be transitory, and if the growth rate in the market slows down, this occupancy can quickly disappear.

While both types of occupancy contribute to a self-storage facility's revenue, core occupancy is generally considered more valuable as it provides a more predictable income stream. However, transitory occupancy can help fill vacancies during slow periods and generate additional revenue. Overall, a healthy balance between transitory and core occupancy is important for the success of a self-storage facility.

Measuring Population Growth

One way to measure the growth rate of a market is to look at the population growth. Using data tools such as Esri, it's possible to drill down into specific neighborhoods and sections of a city to see the growth rate in each area. By understanding the growth rate of a specific area, we can estimate the number of people who are likely to move into the area and therefore the potential demand for storage facilities.

Calculating Demand for Storage

It's important to note that not everyone in a market will use storage facilities, and the percentage of people who do use them can vary based on factors such as age, income, and whether or not they are moving. On average, around 10% of a population will use storage facilities, but this number can vary depending on the market.

To calculate the potential demand for storage in a specific market, we need to take into account the growth rate and the percentage of people who are likely to use storage facilities. For example, if a market has a 7% growth rate and a population of 20,000 people, this equates to around 1,400 people moving into the area. If we assume that 50% of these people uses storage facilities due to factors such as age and income, this equates to around 700 people.

Now, let's take a closer look at the numbers. We estimate that there are 20,000 people in this market, and using a conservative estimate of 20 square feet per capita, we get a total storage demand of 400,000 square feet. If we assume that the average storage unit size is 150 square feet, then we can estimate that around 300,000 square feet of storage units are likely to be occupied.

However, if we assume that only half of the transitory population actually needs storage, we get a demand of 150,000 square feet. This is still a significant demand, and if the trend of people moving into the area suddenly stops, we could potentially lose up to 300,000 square feet of demand in a market that currently has 400,000 square feet of storage space available.

This is why I'm concerned about building storage facilities based solely on projected growth rates. It only works if the area continues to experience mind-blowing growth. But since we can't predict the future, it's better to focus on core occupancy rather than growth.

Furthermore, it's important to note that the average storage unit size in this area is higher than the national average of 8-11 square feet per capita. This suggests that there is a cultural factor at play. Perhaps people in this area simply use more storage.

Overall, these numbers are concerning, but they also present an opportunity to reevaluate our approach to building storage facilities. By focusing on core occupancy and understanding cultural factors, we can build facilities that better meet the needs of our customers.

Evaluating the risk in a seemingly good market requires a careful understanding of the types of occupancy, population growth rates, and the percentage of people who are likely to use storage facilities. By taking these factors into account, we can make informed decisions about whether or not to invest in a particular market and identify potential pitfalls before they become major issues.

• Difference between unit square footage and actual units to people

One of the things that many people overlook is the difference between unit square footage and actual units to people. Let’s talk about the importance of understanding this difference, and how it can impact the success of your storage facility.

I just had a mind-blowing conversation with Mike Burnham about storage units and square footage. I never thought that there could be a difference between unit square footage and actual units to people, but Mike opened my eyes to a whole new perspective. Let me share with you what I learned.

Storage Units per Capita

Mike and I were discussing the average storage unit size per person. He mentioned that on average, there are 20 to 30 square feet per capita for storage units, depending on the location. However, he also talked about owning a storage facility in New York, where there is an average of only six square feet per capita. I immediately assumed that we had more storage units per person in our facility, but Mike corrected me by saying that they have more storage units per person in New York. This confused me, and I asked him to explain.

This conversation led me to think about storage units per people. Instead of focusing on square footage per capita, we should look at how many doors there are per person. This factor can significantly impact the number of storage units available to people in a particular area. Therefore, when developing or investing in a storage facility, it is essential to consider both square footage per capita and storage units per people.

I never considered the impact of unit size on storage units per person. It's fascinating how this factor can make such a significant difference in the number of storage units available in a particular area. Going forward, when looking at markets or developing storage facilities, it's crucial to consider both square footage per capita and storage units per person.

Unit Size Matters

Mike explained that the reason for this is the size of the storage units. In New York, they have storage units that are smaller than five by fives, which are like closets. In comparison, our average storage unit size is ten by twenty. Therefore, in New York, there are more storage units per person because they have smaller units. He also said that one of their storage facilities has 12,000 units, while our biggest one has only 800 units.

The Market and the Demand

When it comes to storage space, the demand can vary greatly depending on the market. Some markets may have higher demand for smaller units, while others may have higher demand for larger units. It's important to take into account the specific market you're building in, and tailor your facility accordingly.

For example, in New York City, the demand for storage space is high, but the square footage per capita is only six square feet. This means that people are using more storage units, despite having less square footage available to them. On the other hand, in other markets, such as those in suburban areas, the demand may be for larger units, and the square footage per capita may be higher.

Maximizing Storage Space

When it comes to maximizing storage space, it's not just about the unit square footage. You also have to consider the actual units to people ratio. This means thinking about how many units you can fit into your facility, and how much space each unit takes up. By optimizing this ratio, you can create a facility that is both efficient and profitable.

For example, let's say you have a market where the demand is for smaller units. In this case, you may want to consider building more units with smaller square footage, as this will allow you to fit more units into your facility, and cater to the demand. On the other hand, if the demand is for larger units, you may want to consider building fewer units with larger square footage, in order to maximize the space available to each customer.

When it comes to storage space, there is no one-size-fits-all solution. It's important to understand the specific market you're building in, and tailor your facility to meet the demands of that market. By taking into account the difference between unit square footage and actual units to people, you can create a facility that is both efficient and profitable, and meets the needs of your customers.

• Product Type/Utilization

Let’s talk about the 3rd one: ProductType or Utilization in the self-storage industry. It's amazing how much impact the product type or utilization can have on the success of a self-storage facility.

Understanding Product Type/Utilization

When it comes to self-storage facilities, it's not just about the square footage of storage space in the market. The product type or utilization is also a crucial factor to consider.

For example, if a market that's growing at 3% has four square feet of storage space per capita, but all of that space is in 10x10 units, and people in that market prefer larger units, then the demand for those 10x10 units will be low. This is why it's essential to take a deeper look into the product type and utilization of a market.

Another example of the impact of product type or utilization is climate-controlled units. In some markets, people are willing to pay more for climate-controlled units, but in others, they don't see the value in paying extra. It's also true on the inverse. For instance, in Arizona, people are paying twice to three times as much to build a unit that gets 30% less revenue because they assume and think that just because it's climate-controlled people will pay more. That's not true at all. You have to dig in deep to see these things. 

Location and Competition

Location and competition are also crucial factors. Some markets are high-risk because they are boomer/bust markets that experience ebbs and flows in transitory occupancy. In contrast, others have a stable rate runway and don't experience significant fluctuations in occupancy.

When investing, it's crucial to look for markets with less transitory risk and a stable demand for self-storage units. For example, two years ago, I looked at a market with a long rate runway and less transitory risk, which was Oklahoma. It didn't have significant growth potential, but it was stable, and there was less competition.

Investing in Self-Storage Facilities

When investing in self-storage facilities, it's crucial to remember that it's not like investing in real estate, apartments, or other properties. Self-storage facilities have unique demands and require specialized knowledge. However, if done correctly, investing in self-storage facilities can have less risk than people think. It's essential to have sufficient capital, be in a good core market with stable demand, and have a stellar rate-to-build cost margin. For example, I chose to build in a market with $2 per square foot in rates where I could build at $100. That way, even if the rates were cut in half, I would still be okay.

Investing in self-storage facilities can be a profitable venture if done correctly. It's crucial to consider factors such as location, competition, and product type/utilization. Understanding the unique demands of self-storage facilities and looking for markets with stable demand and less transitory risk can help mitigate risk and increase profitability.

How to Dig Deeper

So, how can you dig deeper to understand the product type or utilization of a market? One way is to conduct market research and gather data on consumer preferences and demand. This can involve surveys, focus groups, and analyzing industry data.

Another approach is to examine the competition and see what types of units they offer, what their occupancy rates are, and what their pricing strategy is. This can give you insights into what type of units are in demand and what the market can support.

Product type or utilization is a critical factor to consider when investing in self-storage facilities. It's not just about the square footage of storage space in a market, but also the types of units that people want and are willing to pay for. Conducting market research and analyzing the competition can help you gain a better understanding of the product type and utilization of a market. By doing so, you can make informed investment decisions and maximize your profit potential. 

The Cost of Self-Storage Development Skyrockets: What's Driving the Trend?

When it comes to real estate development, we often focus on the positive aspects - the opportunities, the potential revenue, and the growth potential. But it's important to acknowledge that there are also risks involved. In the self-storage industry, in particular, we're currently facing some unprecedented challenges that are putting a strain on development. Let's take a closer look at these risks and how to navigate them.

Cost Increases

The first major risk we're facing is the massive increase in development costs. We've never seen cost increases like this in self-storage before. And unfortunately, these cost increases don't seem to be going away any time soon. What's driving this trend? There are a few factors at play:

• Increased demand for materials and labor due to the construction boom
• Supply chain disruptions caused by the pandemic
• Tariffs and trade tensions affecting the cost of raw materials

The rise in construction costs has created a big problem for the self-storage industry. Developers are struggling to build new units at a cost that justifies the rising rental rates. As a result, the market has seen a 40% drop in rates in some markets. This has created a cratering effect on the market, where developers are forced to cut their rates by up to 60% just to fill up units. This, in turn, has led to multiple developers cutting their rates, causing rates to drop even further. The end result is a market that cannot sustain high rental rates and is struggling to fill up units.

All of these factors are contributing to higher costs for self-storage developers. And as the costs of land, materials, and labor continue to rise, it's becoming increasingly difficult to make development projects financially viable.

Occupancy and Rate Trends

The second major risk we're facing is related to occupancy and rate trends. Historically, the self-storage industry has been relatively stable, with steady occupancy rates and modest increases in rental rates. But in recent years, we've seen some significant shifts:

• Record-high occupancy rates, driven by strong demand for storage space
• Rapid increases in rental rates, particularly in hot markets
• A sudden reversal of these trends, with occupancy and rental rates starting to decline

These fluctuations can make it difficult for developers to accurately predict future demand and set rental rates that will be sustainable in the long term.

Conclusion

While the self-storage industry offers many opportunities for growth and revenue, it's important to acknowledge the risks and challenges involved. With rising costs and fluctuating market conditions, developers need to be strategic and flexible in their approach. By doing your due diligence, planning for contingencies, focusing on quality, and staying nimble, you can navigate these risks and build successful self-storage projects.